Microsoft's Office 365, Cloud Businesses Power Earnings

Belinda Weber

Microsoft said its commercial cloudrevenue is on an annual run rate of $15.2 billion exiting the fiscal third quarter as the company reported better-than-expected financial results. Personal computing revenue fell 7 percent from a year ago to $8.8 billion.

Overall, it's a solid quarter for Microsoft as it continues to compete against both Google and Amazon for cloud customers.

Growth in cloudrevenue is seen as a key indicator of Microsoft's progress as the company transitions away from legacy businesses.

Even as the Windows operating-system franchise continues to generate big profits, the cloud gains are crucial as Microsoft battles Amazon.com Inc. and Alphabet Inc.'s Google for a piece of the so-called cloud-infrastructure market that is expected to reach $71.55 billion in 2020, up from $25.29 billion previous year, according to market-research firm Gartner Inc. Non-GAAP earnings were 73 cents a share on revenue of $23.6 billion.

Revenue of $23.6 billion, versus $23.62 expected.

On a call with CNBC, Microsoft said the shortfall was specifically due to "lower than expected Surface Pro unit volume", but noted that one big reason for that product is to spur growth of similar "2-in-1" devices (combo tablet-laptops) across the entire industry. Microsoft now has 26.2 million Office 365 consumer subscribers. Going into the earnings report, analysts were primarily focused on Microsoft'scloud business as well as the integration of LinkedIn.

The most notable item in that listing of product growth is Surface and the 26 percent decline in the third quarter. Xbox software and services revenue rose by 7% (8% CC), "driven by continued adoption of digital distribution and a strong game lineup". This was the first full quarter in which LinkedIn was part of Microsoft, and it drove $965 million in operating expenses, including $153 million in amortization of intangibles - a term that usually covers things like goodwill, trademarks, or brand value. The expectation here was that LinkedIn would contribute about $950 million to Microsoft'sproductivity and business processes segment and those numbers for LinkedIn came in a bit higher at $975 million.

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